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May 9, 2006
A Chill Is in the Air for Sellers
By DAMON DARLIN and VIKAS BAJAJ
Many Americans who planned on real estate as their path to wealth are beginning to find that there are limits to how high is up.
Blame market forces. As higher interest rates dampen demand in cities and suburbs that only a year ago were battlegrounds for fierce bidding wars among numerous buyers, sellers are grudgingly lowering their prices to drum up interest.
A house at 57 Marina Boulevard in San Rafael, across the bay from San Francisco, was originally listed at $1.45 million. The owner recently dropped the price to $949,000 when a competing house on the same street lowered its price to $959,000, from $989,000. In Marin County, the prices of about a quarter of all listings have been reduced. County records show that 57 Marina Boulevard was sold in February for $700,000, so the owner, Dan Marr, is unlikely to lose money even at the lower price, though he may not make as much as he had hoped. “I don’t want to talk about it,” he said.
It is getting tough out there for sellers. What is happening in Marin County is being repeated in cities and suburbs across the United States. Nearly a year after the sales of homes peaked, buyers are wresting control from sellers in many areas as inventories of unsold homes have grown, in some markets doubling. Few people are losing money after the run-up in housing prices in the last 10 years, but the air is coming out of the market.
It is a slow leak, to be sure. The most widely used statistic to measure home values, the median home price, shows that once-hot markets like San Mateo, Calif., and Mercer County, N.J., are now registering year-over-year declines. In general, prices are still climbing, but they are doing so far more slowly in cities like Las Vegas and San Diego, which had been lucrative markets for speculators.
“It’s going from a seller’s market to a buyer’s market,” said David Lereah, the chief economist for the National Association of Realtors. In March, “price appreciation went down to 7.4 percent, from over 10 percent,” he added. “That most probably reflects that sellers are bringing their prices down.”
As always, real estate remains intensely local and sellers have retained, or regained, control in some markets, because there are fewer properties to be had and demand is being bolstered by stronger job markets. Even in markets with growing inventories like Chicago, the situation is not uniformly weak in all neighborhoods.
ZipRealty, the discount real estate broker, has found widespread price reductions in the multiple listing services used by all agents to advertise homes. Prices have been trimmed on 35.7 percent of all homes currently listed for sale in the Boston area, for example. The same is true for homes in San Diego, Sacramento, Los Angeles and Miami. And prices have been snipped on a quarter of the homes in Chicago, Washington and Baltimore.
In Silicon Valley, where jobs are coming back after the collapse of the technology bubble, Richard Calhoun, a real estate agent, said that the number of homes sold was now 85 percent of the 25-year average. A year ago, it was 30 percent above that average. In Santa Cruz, inventories have tripled to 124 days, from 42 days.
A result is that the median price of homes in San Mateo County dropped 2.7 percent, to $875,000, in March, from $899,000 a year earlier.
“It’s clearly a slowdown,” Mr. Calhoun, the Silicon Valley agent, said. “But how can you complain when more than 50 percent of sellers are getting more than their asking price and when you have only two months of inventory when in other places four to six months is considered normal?”
Elsewhere, for the first time in nearly a decade, you can smell the anxiety. The listing agent for a four-bedroom home on Scripps Trail in San Diego informed other agents in the multiple-listing service that a “very, very motivated seller will entertain all reasonable offers” and “will help with closing costs.” The house was listed in September at $810,000. After a previous price cut, the seller is now willing to entertain offers as low as $685,000.
The seller bought the house for $730,000 in 2005, according to county property records, for what the listing agent said were investment purposes.
Taking a loss is still rare for sellers, because homes appreciated so much in the 1990’s and 2000’s. Stephen and Brenda Abelkop bought their four-bedroom house in La Jolla, Calif., for around $850,000 about 15 years ago.
When they put it up for sale right after Thanksgiving, they followed their agent’s advice to ask for $2.75 million. “You price it for the market,” Mr. Abelkop said.
But they didn’t attract much interest. Inventories in the San Diego area have risen 25 percent in the last year, to more than 19,000 unsold homes, a record. So there is a lot more competition, even for a high-end property like the Abelkops’ house, which has sweeping views of San Diego Bay. They recently dropped the price to a range of $2.5 million to $2.7 million and said the drop had resulted in more buyer visits.
Some agents say setting price ranges attracts buyers who would otherwise walk away thinking the home was too expensive. Others say it is simply a sign of a wavering owner.
Because sellers are not panicking, it appears unlikely that the real estate market will fall abruptly. “Sellers remain optimistic,” said Edward Leamer, an economist at the University of California, Los Angeles.
Mr. Leamer sees some evidence that the bubble is deflating slowly, but says he finds it striking that it has taken so long. For example, sales volume peaked in the San Diego area in the summer of 2003. Only in January did inventories begin to swell, hitting an eight-month supply of homes that month, and sellers began to get nervous enough to bring the prices down.
Inventories have since moved closer to a six-month supply of homes, which balances the volume between buyer and seller.
PMI, a company that tracks risk in the real estate market for mortgage lenders, said the chances were increasing that prices in San Diego would decline in the next two years. The company said the city had a 60 percent chance of a decline, up from 52.8 percent last summer.
Prices in most of California and the Boston-to-New York corridor could also fall, said Mark Milner, the company’s chief risk officer. Its statistics, which lag the current market by about two months, show homes continuing to appreciate, but at a slower rate.
After open houses for their four-bedroom, two-story ranch house in Lawrenceville, N.J., brought in no offers, Mary Ellen and Anthony Pierrard are telling potential buyers they are willing to negotiate their $420,000 asking price and are even considering enlisting a real estate agent to help them market their home. That’s a far cry from the couple’s experience selling two houses on their own in Rockland County, N.Y., a few years ago.
“During the first open house for both, we received a minimum two to three offers,” Mrs. Pierrard, a corporate employee relations manager, said. “We sold them on the first day. Now, no one is even making an offer, period.”
Robin L. McCarthy, a real estate agent who works in nearby Princeton, N.J., said homes were sitting on the market three to four months, when houses sold in as little as a few days a year ago. Houses that would have been the subject of intense bidding wars now sell for slightly less than asking price.
“Buyers are afraid that real estate prices are going to go down, so they are very careful,” Ms. McCarthy said. “They don’t want to pay too much.”
Thus far, prices have not fallen in any of the 375 largest American cities tracked by the PMI Group. But many are showing a sharp deceleration in price increases, among them Las Vegas, San Diego, Elmira, N.Y., and Lebanon, Pa.
Still, those cities are outnumbered by cities where prices are drastically accelerating — like St. George, Utah; Binghamton, N.Y.; Boise, Idaho; Naples, Fla.; and most cities in Arizona.
“We’d expect a soft landing in prices because, naturally, the economy is strong,” Mr. Milner said. Unless a recession hits and people begin to lose jobs, house prices will fall slowly, most economists say.
In the new home business, large builders like Toll Brothers and Hovnanian Enterprises report that orders have fallen 4 percent to 29 percent but that average selling prices are still rising, albeit more slowly than six months ago. Nationally, however, the Commerce Department reported that median new-home prices — half the homes sold for more, half for less — fell 2.2 percent, to $224,200, in March from a year ago. It was the first year-over-year price decline since February 2003.
Inventories are not high in every city. For a variety of reasons, mostly stronger job markets, sales and prices are picking up in markets like Houston, Boise and Dallas, which did not see a boom in recent years, experts say.
In Seattle, for instance, some buyers are enmeshed in bidding wars that push prices far beyond the asking price — a phenomenon that was common in San Diego, Las Vegas and Washington only a year ago. Glenn Kelman, chief executive of Redfin, a new online real estate service based in Seattle, has hired a champion video gamer, with great thumb-twitching skill, to speed data entry during the multioffer auctions. “Polite, soggy Seattleites have become blood-thirsty cannibals,” he said.
Houston appears to be benefiting from strength in the energy industry, robust hiring and transplants from Louisiana. More than 100,000 hurricane evacuees are living in the city and its suburbs. Clint Simpson of Greenwood King Properties said that in the last month he had represented four home buyers who were relocating to Houston because their companies were scaling back operations in New Orleans.
“Houses are getting multiple offers the first week on the market and many of them are going over list,” he said.
In March, sales of existing homes were up 22 percent from a year earlier and median prices rose 5.4 percent, to $143,310, according to the Houston Association of Realtors. Inventories fell by nearly 3 percent in the month.
Formerly hot coastal markets and previously flat markets in the middle of the country have reversed their roles, said Mr. Lereah, from the Realtors association.
In Chicago, real estate agents say each neighborhood is different. A high-rise building boom has created a glut of condos downtown and buyers can often negotiate free parking spaces, which previously would have cost $35,000. But the pickings are so slim in the popular Lakeview area north of the central business district that an agent, Brad Lipitz, recently found only three listings there. “Chicago is comprised of many markets,” he noted.
In Southern Florida, agents and sellers say sales have slackened as inventories have ballooned, but they note that prices are not falling.
Donna L. Lanzon sold her late mother’s two-bedroom condo in Deerfield Beach in Broward County in March. The condo was initially priced at $250,000, but Ms. Lanzon reduced the asking price to $235,000 and sold the 1,260-square-foot, two-bedroom unit for $225,000 after three months on the market.
Her agent, Cathleen Flanagan, who works for ZipRealty, said the growing inventory — the Fort Lauderdale area had more than 20,000 homes for sale at the end of April, more than four times the level a year ago — had forced sellers to rethink their asking prices and offer incentives, like increasing the commission of the buyer’s agent to 4 percent, instead of following the usual practice of splitting a 6 percent commission between buyer’s and seller’s agents. One seller recently offered a free five-night Caribbean cruise for two.
Do the tactics work? “Absolutely; it makes sense,” Ms. Flanagan said. “A lot of buyers’ agents will go out there to see the home.”